Case Study: Should Packing Be Postponed to DC?
Penang Electronics (PE) is a contract manufacturer that produces and packages private-label products for
several retail chains, including Target, Best Buy, Office Max, and Staples. In each case, the core products are
identical, with the only difference being the labeling and packaging. Thus, once labeled and packed, a product
cannot be sent to a different customer. The previous month had been very challenging because despite having
leftover Target and Staples inventory, PE could not meet some other orders using these units. PE had lost
business while incurring unnecessary inventory costs, all because of the wrong labels and packaging.
Currently, PE uses a production facility in Malaysia to manufacture, label, and pack all products. This facility
replenishes a DC in St. Louis, from which PE fills all customer orders. The manufacturing and transportation
lead time from Malaysia to St. Louis is 9 weeks on average, with a 2-week standard deviation, distributed
normally. PE uses a periodic review policy with 4-week review cycles to manage inventories at its DC and aims
to provide a CSL of 95% for each product to every customer.
Labeling and Packaging at the DC
The VP of supply chain management at PE proposed postponing the final labeling and packaging task to the
DC. Her logic was that doing so would allow PE to use all available inventories to serve any customer. In
particular, the situation that arose in the previous month when the leftover inventory could not be used to meet
extra customer demand could have been avoided through postponement. If labeling and packaging was
shifted to the DC, the mean lead time of manufacturing and transporting the basic product from Malaysia
would be reduced to 8 weeks, with the standard deviation reduced to 1 week. Labeling and packaging were
relatively quick steps and the response time from the DC to the customer was not expected to change.
The DC management was opposed to this idea because it would create additional work that was different from
what they had done so far. A detailed study of the production process showed that labeling and packaging at
the DC would add $11.50 to the cost of each product. DC management believed that this increase in cost
would be held against them once the process was changed, and they would be under new pressure to lower
their costs. They also believed it would complicate the work they did, which could adversely impact quality.
Evaluating the Two Options
To evaluate the two options, a team from both manufacturing and the DC was set up. The team decided to
focus its analysis on three major product categories (computers, tablets, and printers), and four major
customers (Target, Best Buy, Office Max, and Staples). Weekly demand forecasts (normally distributed) for
each product and customer is shown in the table below. PE currently incurred a total cost of $1,500 per
computer, $700 per tablet, and $250 per printer. Given the short life cycle of these products, PE used an
annual holding cost of 30 percent when making its inventory decisions.
Computers Tablets Printers
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Target 1000 850 2000 1000 4000 1050
Best Buy 700 500 1500 800 4500 900
Office Max 800 600 1200 600 2000 700
Staples 500 350 900 500 1500 400
1. What is the total annual cost for the current system in which product is produced, labeled, and packed in
Malaysia before being shipped to the DC?
2. How would the total annual cost change if labeling and packaging were moved to the DC? Should this
postponement idea be implemented?